DCIT LTU 2, MUMBAI vs. TATA MOTORS LTD, MUMBAI

The revenue has filed the present appeal against the order dated 03.03.2018 passed by the Commissioner of Income Tax (Appeals)-1 (for short ‘the CIT(A), Mumbai, for the assessment year 2007-08, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee filed its return of income for the assessment year under consideration declaring total income of Rs. 1284,54,70,964/- under the normal provisions of the Act and Rs. 2188,13,41,552/- u/s 115JB of the Act. The case was selected for scrutiny, and the AO passed assessment order u/s 143 (3) r.w.s. 144C determining the total income of the assessee at Rs. 1287,74,27,653/- under normal provisions of the Act and Rs. 2375, 41, 87,553/- under section 115JB of the Act. Subsequently, order u/s 143 (3) r.w.s. 263 of the Act was passed and the Assessment Year: 2007-08 income of the assessee was determined at Rs. 1414,20,12,200/- under the normal provisions of the Act. Further, order u/s 154 was passed to rectify the order passed u/s 143(3) read with section 263 of the Act and determined the total income at Rs. 1444,34,52,200/- under the normal provisions of the Act. Since, it was noticed that the assessee had excluded gain on exchange fluctuation amounting to Rs. 39,22,70,379/- from the taxable income and credited to the profit and loss account, the AO passed order u/s 154 and added the said amount to the total income of the assessee rejecting the contention of the assessee that foreign exchange fluctuation is on capital account and hence excluded from computation of income. In the first appeal, the Ld. CIT (A) set aside the order passed by the AO and deleted the addition. The revenue is in appeal against the said findings of the Ld.CIT (A). 3. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- 1.On the facts and in the circumstances of the case & in law, the ld. CIT (A) erred in holding the order passed by the assessing officer u/s 154 of the Income-tax Act as bad in law when the order was passed by the assessing officer in exercise of powers conferred by the section 154 of the Income tax Act to rectify the mistake apparent from record and was within the boundaries of law. (ii) On the facts and in the circumstances of the case and in the law, the ld. CIT (A) erred in holding that forex loss or gain arising on account of Foreign exchange fluctuation pertaining to Foreign currency convertible bonds (FCCB) utilized for general business purpose and not with respect to capital account is in the nature of “Capital Loss”.

Before us, the Ld. Departmental Representative (DR) submitted that the Ld. CIT (A) has erred in holding that the foreign exchange loss or gain arising on account of foreign exchange fluctuation pertaining to foreign currency convertible bonds (FCCB) utilized for general purpose business and not with respect to capital account is in the nature of capital loss. The Ld. DR further submitted that the Ld. CIT (A) has wrongly held that the order passed by the AO u/s 154 of the Act is bad in law as section 154 confers powers to rectify the mistake apparent from record. The Ld. DR. further submitted that since the Ld. Assessment Year: 2007-08 CIT (A) has wrongly deleted the addition made by the AO, the said order may be set aside and the order passed by the AO may be restored.

Per contra, the Ld. counsel for the assessee submitted that this issue is covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of Tata Locomotive and Engineering Company Ltd. (60 ITR 405 SC) the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Jagjit Industries Ltd. (2010) 191 Taxman 54 (Delhi) and the judgment of the Hon’ble Madras High Court in the case of CIT vs. PVP Ventures (2012) 23 taxmann.com 286 (Madras). The Ld. counsel further submitted that since the order passed by the Ld. CIT (A) is in accordance with the law laid down by the Hon’ble Supreme Court and the High Courts in the cases referred above, there is no merit in the appeal of the revenue, hence the same is liable to be dismissed. 6. We have heard the rival submissions of the parties and carefully gone through the material on record including the cases relied upon by the Ld. counsel. The Ld. CIT (A) has decided this issue in favour of the assessee on the grounds that the issue involved is covered in favour of the assessee by the various judgments of the Courts and the issue involved in the present case is beyond the scope of section 154 of the Act. The findings of the Ld. CIT (A) read as under:- “5.3.1. I have considered the facts and circumstances of the case and the detailed submission of the appellant. Firstly, the issue of exclusion of gain arising on account of foreign exchange fluctuation held for capital purpose is settled in favour of the appellant in its own case by the Hon’ble Apex Court which was also followed further by the Hon’ble Apex Court in the case of Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1) (SC). The relevant portion of the decision of Apex Court in Sutlej Cotton (supra) is reproduced as under:-

As pointed out by the Ld. counsel for the assessee this issue is covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of Tata Locomotive and Engineering Company Ltd. (supra). The question before the Apex Court was “(1) Whether on the facts and in the circumstances of the case, the surplus or difference arising as a result of devaluation in the process of converting dollar currency in regard to the sum of $ 36,123.02 repatriated to India was profit which was taxable in the hands of the assessee?

Since, the Hon’ble Bombay High Court had answered both the questions in negative, the revenue challenged the said findings before the Hon’ble Supreme Court. The Hon’ble Supreme Court affirmed the findings of the Hon’ble High Court holding as under:- “A number of cases have been cited before us, but it seems to us that the answer to the questions depends on whether the act of keeping the money, i.e. $ 36,123.02, for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction. If it was part of or a trading transaction then any profit that would accrue would be revenue receipt, if it was not part of or a trading transaction then the profit made would a capital profit and not taxable. There is no doubt that the amount of $ 36,123.02 was a revenue receipt in the assessee’s business of commission agency. Instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilize the commission in its business of Assessment Year: 2007-08 manufacture of locomotive boilers and locomotive for buying capital goods. That was quite an independent transaction, and it is the nature of this transaction, which has to be determined. In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotive it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital good. If the assessee had repatriated $ 36,123.02 and then after obtaining the sanction of the Reserve Bank remitted $ 36,123.02 to the U.S.A., Mr. Sastri does not contest that any profit made on devaluation would have been a capital profit. But in our opinion, the fact that the assessee kept the money there does not make any difference especially, as we have pointed out, that it was a new transaction which the assessee entered into, the transaction being the first step to acquisition of capital goods. In the view we have taken it is really not necessary to discuss cases cited at the bar because none of the cases are exactly in point. In our view the High Court was right in answering the questions in the negative. In the result appeal fails and is dismissed with costs.”

In the case of CIT vs. PVP Ventures (supra) the Hon’ble Madras High Court has upheld the findings of the ITAT directing the AO to treat the entire gain on account of exchange rate fluctuation as capital receipt. The ITAT had decided the said issue by following the judgment of the Hon’ble Madras High Court in the case of E.I.D. Parry Ltd. vs. CIT 174 ITR 11, in which the Hon’ble court had held that if foreign currency is held as capital asset or as fixed capital, profit or loss arising on account of fluctuation in the value of foreign currency would be in the nature of capital receipt. 10. It is apparent from the notes filed by the assessee along with the revised computation of income that the assessee has excluded the net exchange fluctuation from the computation of income being on capital account. The exchange fluctuation was on borrowings (foreign currency convertible bonds) utilized for purchase of domestic fixed assets (non imported assets), loan given and investment made; (b) loans given; (c) deposit placed out of above foreign currency convertible bonds. Assessment Year: 2007-08 11. Further, the paper book contains the following detail filed by the assessee regarding treatment of foreign exchange fluctuation of capital account in computation from AY 2007-08 to AY 2012-13:-